Does your will cover your superannuation?

We all should have a will, to avoid leaving our family with a legal mess, and to ensure our assets are dealt with as we wish. However, most people have savings tied up in super and may have assets held in trust. Your will may not cover these.

What happens to your superannuation on your death is governed by the rules of the superannuation trust deed. Your will does not control your super unless you direct that, on your death, it is to flow into your estate, under the rules of the super fund.

Binding death benefit nominations

Superannuation fund rules generally allow you to sign a form known as a Binding Death Benefit Nomination or BDBN. This is a form directing who should receive your super if you die. This applies both to self-managed super funds and large professional funds.

By using a BDBN, you can direct your super to go to one or more nominated beneficiaries, or you can direct it to form part of your estate, to be dealt with under your will. These choices are very important as they can have a significant effect on the amount of tax the beneficiaries pay.

Signing BDBNs

When you set up a self-managed super fund, or when you join a retail fund, you need to sign a number of documents. One of them is usually a BDBN, and it is often signed with very little discussion or thought. However, on your death, it is a vitally important document, though it should be considered with care.

Leaving your super to your estate

If BDBN directs your super to form part of your estate, it is dealt with according to your will. Your will can direct your super and other assets into trusts for your family members. These trusts are known as testamentary trusts. There is usually one testamentary trust for each of your beneficiaries. Each testamentary trust is controlled by a beneficiary unless they are underage at the time of your death. In that case, the trust is controlled by a trustee you nominate until the beneficiary is old and responsible enough to control it themselves. If you leave your super or other assets to testamentary trusts, the trusts give protection for the inheritance of your family members from creditors and spouses and give substantial tax savings.

On the other hand, if you do not have testamentary trusts established in your will, there can be tax savings and asset protection advantages in using a BDBN to direct your super to your spouse or other dependants. So, a BDBN requires good legal advice to weigh up all the options. Click here for more information on testamentary trusts.

What could possibly go wrong?

The legal requirements for a BDBN are also very technical. In a 2015 case, a deceased left a BDBN giving his super to the “trustee of deceased estate”. He intended his super to pass into his estate, then benefit the 2 daughters of his first marriage. However, the court held that the BDBN was invalid because it did not use the magic words “legal personal representative”. The result was that the super went to the deceased’s second wife, contrary to his wishes.

We recently handled the estate of a person whose will left everything to trusts for the benefit of his children, over which they were to get control at the age of 30. The trustee of the superannuation fund gave the deceased’s substantial superannuation entitlements to the children equally, even though they were still in their early 20’s. Clearly, the deceased would have preferred those funds to be protected by trusts while his children were still under the age of 30.

Another reason for signing a nomination is to minimise the tax that can fall on superannuation, depending on who is to receive it. If the deceased is receiving a pension from the superannuation fund, it may be beneficial to use a nomination to enable a beneficiary, such as a spouse, to continue to receive the same pension as the deceased had been receiving.

Many super funds fail to explain the death benefit nominations clearly to their members. As a result, many people believe their death benefit nomination is a BDBN when in fact it is non-binding, and many others have made an invalid nomination (e.g. to a parent or sibling) which the super fund has not advised them to correct.

These important issues should be carefully considered, with expert legal advice as part of estate planning including your will.

Contact Stephen Lynch on (02) 9923 2321 or slynch@somervillelegal.com.au